SaaS organizations should strive to be metrics driven. They should want to understand these metrics and manage their businesses to them. But there are many metrics to consider…and all are important. There are valuation metrics, sales metrics, marketing metrics and pure financial metrics. There are, at least, 30 key metrics that SaaS companies should use to build their financial models and measure their ongoing business.
It is always surprising when entrepreneurs do not know or understand the key metrics that drive their business and therefore, drive their valuation. It is like driving your car and never knowing what is on the dashboard and never looking at the dashboard or trying to maintain your health and never getting on a scale or having your blood pressure or cholesterol checked. It is even more surprising when an entrepreneur does not even know the definition of a critical metric in their business.
There are multiple reasons for understanding and then paying attention to key metrics of your business:
- Knowing your key metrics is an essential CEO responsibility
- These metrics drive your business
- These metrics drive your valuation
- Metrics are the quantitative way to evaluate your company’s performance
- They will tell you precisely where you are and how you are doing
- They set the basis for your strategy
- Investors will need to understand these metrics before they invest and will use them for their valuation calculation
- You have to evaluate the right metrics
- You have to set challenging but realistic goals around the key metrics
- You have to manage the performance drivers of the metrics. Good numbers don’t just happen. There are drivers for each metric.
Below are some key metrics that should be understood and managed. This list is comprehensive and some may find it intimidating. But building a business requires some level of complexity and each metric offers value.
- New Contract Bookings per Period
- Cash Balance
- Cash Revenue
- GAAP Revenue
- Monthly Recurring Revenue
- Annual Recurring Revenue
- New sales/rep ratio
- Contract bookings per rep ratio
- Sales/distribution partner ratio
- Average contract value (recurring versus services)
- Customers per support rep ratio
- Revenue per employee ratio
- Customer attrition
- Monthly average users (MAU)
- Customer Acquisition Cost (CAC)
- Lifetime Value of Customer (LTV)
- Sales Cycle Time (in days)
- Win rate percentage (by stage in sales cycle)
- Total pipeline strength (by month)
- Lead count (monthly)
- Lead source
- Cash Flow Positive Date (when will your company begin to generate cash rather than burn cash)
- Profitability Date (when will your company achieve GAAP profitability)
- MVP development time and cost
- Average time per initial contract (years)
- Lead conversion rate
- Win rate versus individual competitors
- No decision rate (since more deals are lost to “no decision”)
- Number of months of cash on hand
The most critical metric in 98% of businesses today is revenue and most importantly Monthly Recurring Revenue. Equally important are cash and number of months of cash on hand. Some of the other metrics above are drivers or leading indicators of revenue and cash.
Some organizations choose to measure metrics like Facebook, Twitter or blog followers and ignore revenue and cash. This is clearly a mistake. While social media followers can be somewhat useful, beware of fauxmentum. This is false momentum that is really not driving your value. There is a difference between people who want to follow you and people who want to buy from you. Your business will be valued by the latter, not the former. Social media followers are probably less relevant than hits to the website or people who sign up for webinars. These are potential lead generation sources and should be considered as such.
Better understanding of, ownership of and managing to key metrics will dramatically improve your business. It will increase the probability of success, increase your understanding of the drivers of your business, increase the probability of funding, improve your profitability, increase your win rate, shorten your sales cycle, improve customer value and lead to a higher valuation for your company.
For more information on definitions of and how to improve metrics, contact Arbor Dakota below. Arbor Dakota is committed to helping CEO’s grow their great ideas into great companies.